The economics and politics of instability, empire, and energy, with a focus on Latin America and the Caribbean, plus other random blather and my wonderful wonderful wife. And I’d like a cigar right now.

August 24, 2011

Bahamian wages, the limits of small-country Keynesianism, and the Chinese not-empire really is not (yet) an empire

The Bahamas are not rich by the standards of the United States and Canada. But they are not poor by the standards of the world. There is no desperate poverty, and there are few people cut out of the modern economy altogether. Rather, the country feels like a relatively poor part of the United States. The poor areas are poor, but they are no worse than what you can see all over Florida.

The country’s minimum wage is $4.00 an hour. That’s low by American standards, but high by regional ones: Trinidad’s average wage is only a little higher than the Bahamian legal minimum. “Kitchen helpers” in the hotel industry, one of the lowest-paid categories, average $6.16 per hour. Shop sales assistants make $7.37 an hour. Gas station attendants make $8.00; cashiers $8.40, and housekeepers $10.53. The average hourly wage for all production workers was $13.00, and the average work week was 38 hours. These wages are not low. In fact, average nominal wages in the Bahamas ($13.00) are on a par with Mississippi ($12.83), Puerto Rico ($12.92), and West Virginia ($13.19).

The Great Recession has badly wounded the Bahamian economy, but no worse than several parts of the United States. Bahamian unemployment remains high at 13.7%. That said, unemployment in Minnesota (14.1%), Nevada (13.7%) and Puerto Rico (16.3%) exceeds the Bahamian level, while the other low-wage jurisdictions in the United States don’t show low unemployment: Mississippi with 11.1% and West Virginia with 9.0%.

What is the Free National Movement (FNM) government doing about the economy? Monetary policy, of course, is mostly out of their hands. Capital controls mean that the government also has some room to use monetary policy — it recently slashed the discount rate from 5.25% to 4.50% — but the peg to the dollar limits its freedom of action. The government has some scope for a Keynesian boost — the budget deficit is only 3.0% of GDP, and they recently sold the Bahamian Telecommunications Company for $210 million — but it is unlikely to be effective. Why? Simply put, the Bahamas is too small and too open. Imports come to 35% of GDP. Much of any stimulus, therefore, is likely to “leak” away in increased imports.

What’s left, then, besides praying for the United States to get out of the doldrums? Well, Prime Minister Hubert Ingraham has decided to try attracting as much Chinese investment as possible. The Chinese government has taken a $2.75 billion equity stake in the giant Baha Mar resort development. It also provided loans to finance stadium and road construction.

The problem? Well, the economic problem is the same as with Keynesian spending: leakage. The Bahamas is a pretty small economy. It doesn’t produce a whole lot of construction material, and while unemployment is high, it doesn’t have that many skilled construction workers. The Baha Mar construction project will bring in 6,150 Chinese construction workers, while the $70 million new airport road has involved another 200. Not all the construction labor force will be Chinese, of course, but construction is estimated to employ only 4,000 Bahamians. The developers have pledged only $200 million in contracts to Bahamian firms although that might ultimately rise higher.

The China State Construction Engineering Corporation (CSCEC) will get $1.9 billion, or 53% of the total value of the project. Some of that may stay in the Bahamas, of course, but probably not a whole lot: Chinese workers are estimated to remit roughly $12,000 per year. They do, of course, eat and drink — but the Bahamas is a large agricultural importer, and so those expenditures will like benefit American agriculturalists. The government estimates about $80 million or so in tax payments from the CSCEC but that isn’t a lot. The highest estimate is that Bahamian contractors will receive no more than $400 million, or 11% of the total project value — and they will, of course, spend a large chunk of that revenue on imported inputs. In short, at least half the stimulus will leak away and possibly as much as 90%.

The Nassau Guardian summed it up: “"The Bahamas has fallen fully into the embrace of China. And the rising empire has been kind with its gifts … What Bahamians must understand is that when China lends, and it contracts its own workers to do the job, a significant amount of the money borrowed goes back to China with the workers who build the project. They pay their workers with money we borrow … The Chinese also keep their workers in self-contained on-site camps when they are sent abroad. We barely get them to visit our stores to spend the money we borrowed when they are working in our countries.”

This is not to say that the project is a bad deal! Once it’s done, it will provide a solid boost to the Bahamian economy. Even if the U.S. economy stays flat, it should be able to attract business away from other Caribbean resorts. It is to say that a tiny country like the Bahamas can’t really do a whole lot to use countercyclical fiscal policy to boost its economy, regardless of whether the stimulus comes from government borrowing or foreign investment.

The U.S. government worried that China might be “using this investment solely to establish a relationship of patronage with a U.S. trading partner less than 190 miles from the United States.” I don’t see it. Sure, the Chinese government will have a big stake in a giant resort development. If there was some evidence that China had used its state power to unfairly obtain contracts from American firms, then there might be cause for concern, but there isn’t. Nor is there evidence that China bribed or otherwise influenced Bahamian officials.

As for Chinese “patronage,” well, patronage in exchange for what? The U.S. already controls large spheres of Bahamian public policy. The Chinese government isn’t about to force the Bahamas to suspend OPBAT, expel the Coast Guard, sever the link to the dollar, seize American property, restrict American imports, replace the Privy Council with a Chinese court, or station nuclear weapons off the coast of Florida. Given the overwhelming dominance of the United States, and its long-standing and multiple links with the Bahamas, I can’t for the life of me figure out what a “patronage relationship” with Beijing would even mean. In point of fact, “Senior GCOB officials privately expressed that China is not their preferred partner and acknowledge that negotiations are difficult.” Moreover, the Chinese government told the Americans that they were unhappy about the need to take the financial lead on the project: “Chinese embassy officials privately told [a U.S. official] the China Ex-Im bank would prefer another investor in the mix to diminish the financial risk.” E.g., Americans just weren’t interested. So much for the rising empire muscling out the declining one.

The only realistic worry I can see is that the Bahamas might serve a pathway for illegal Chinese immigration, a fear shared by the U.S. Embassy in Nassau: “The continuous arrival of thousands of low-wage Chinese workers in the Bahamas will likely lead to a significant increase in illegal migration of Chinese from the Bahamas to the United States. The GCOB (Government of the Commonwealth of the Bahamas) does not have the institutional capacity to effectively monitor the movements of the Chinese workers nor effectively detect inauthentic travel documents.” But still, that is minor ... and that worry involves the fact that China is still a poor country unable to retain its own people when given opportunities elsewhere.

In short: the Bahamas is rich, small countries have serious economic limitations, and China is still both poor and very far away. Okay, not the deepest conclusions ever, but hey. I am on vacation. And really, any opportunity to reduce the latent China-hysteria in the United States is probably worth taking.

Comments

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I disagree. Although, it'll help the economy, the question now remains what exactly does China want with the Bahamas or any other Caribbean country?

Your research is good, but it doesn't imply what exactly comes with China loaning the Bahamas money. You've spoken about 2 projects, the Chinese are building about 10 projects. And a small country like Bahamas can't possibly pay China back. So no doubt will the immigration laws be changed, they will. You also have to remember that these are two different ideologies and culture.

China got extremely petty with the USA over a minor issue, imagine what can happen if it got angry with the Bahamas or any other Caribbean nation. And so far every Caribbean nation that China has assisted has severed ties with Taiwan. But I guess you see nothing wrong with that?

I live in the Bahamas , more specifically Freeport Grand Bahama and i dont appreciate how u are trying to make my island and country look bad . These are some of the worst pictures you could have possibly taken .Grand Bahama is one of the most beautiful islands in the bahamas . And compared to americas poor people our poor are middle class citizens .